Monday, September 14, 2015

Banks and the Clustering of Mergers and Acquisitions Activity

Industry structural changes are a major M&A catalyst. The changes inhibit incumbent firms’ ability to create shareholder value. This is reflected in the current clustering of M&A activity in the healthcare, technology and oil and gas industries. Banking has also seen increased activity in the number of deals. The deals have been primarily in the smaller community and regional bank segments. Hence, dollar volume is still off pre crisis levels. Larger Too-Big-To-Fail banks are still reluctant to seek regulatory approval. Nonetheless, banking has structurally changed since the financial crisis as reflected in weaker operating performance. Many bank, however, have yet to adjust to the changes.

This is reflected in lower economic returns, ROE less cost of equity, and consequently lower pricing multiples like price to book.  Pricing multiples reflect underlying operating performance. Pressure is building, primarily from activists, to improve returns. Banks who “get it” will enjoy improved returns and values e.g. Warren Buffet’s favorite bank Wells Fargo. They will likely force changes upon weaker banks that “don’t get it” like Bank of America which trades below book value. This will spur increased banking M&A-initially smaller transactions until a larger deal is pushed thru the regulatory log jam. My thoughts on this matter are outlined in my attached American Banker BankThink comment.


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